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    CRDO
    Earnings call· Feb 2025(Q3 FY25)

    Credo Technology Group Holding Ltd CRDO

    Mar 4, 2025 Source

    Executive summary

    Credo Technology Group Holding Ltd Q3 FY25 — Record Revenue Driven by Hyperscale AI Ramp

    Credo Technology Group reported record Q3 FY25 results, driven by a significant ramp with its largest hyperscale customer for AI platforms, confirming the expected business inflection point. The company is actively expanding its product portfolio into PCIe solutions and diversifying its customer base, with management anticipating continued strong revenue growth and operating leverage in the upcoming fiscal year.

    Highlights

    5

    • Record revenue of $135 million, up 87% sequentially and 154% year-over-year.

    • Non-GAAP gross margin of 63.8%, exceeding the high end of guidance.

    • Non-GAAP operating margin reached 31.4%, a sequential increase of nearly 20 percentage points.

    • Product non-GAAP gross margin (excluding product engineering services) grew 934 basis points year-over-year to 62.4%.

    • Achieved full PCIe Gen5 compliance for the Toucan retimer and secured a first platform commitment from a large AI server ODM.

    Concerns

    4

    • Largest customer accounted for 86% of revenue in Q3, indicating high customer concentration.

    • Free cash flow was negative $0.4 million, despite an improvement of $11.3 million from the prior quarter.

    • Cash and equivalents decreased by $3.7 million sequentially to $379.2 million.

    • Q3 ending inventory increased by $16.9 million sequentially to $53.2 million.

    Guidance & targets

    6
    CategoryTargetConfidence
    Revenue
    $155M-$165M
    high materiality
    High
    Non-GAAP Gross Margin
    63%-65%
    medium materiality
    High
    Non-GAAP Operating Expenses
    $50M-$52M
    medium materiality
    High
    Diluted Weighted Average Share Count
    ~188M shares
    low materiality
    High
    Revenue Growth
    greater than 50%
    high materiality
    High
    Non-GAAP Operating Expenses Growth
    half the rate of revenue growth
    medium materiality
    High

    Segment performance

    4
    SegmentRevenueYoYQoQMargin
    Product Business
    Generated $132 million of revenue in Q3, up 91% sequentially and up 155% year-over-year.
    		$132M155%91%—
    IP Business
    Generated $3 million of revenue in Q3.
    		$3M———
    AEC Product Line
    Grew strong triple digits sequentially to achieve new record revenue levels. Achieved volume production with 3 hyperscalers and in qualification with 2 additional hyperscalers, expecting production in fiscal '26.
    		——strong triple digits—
    Product Business (excluding Product Engineering Services)
    Generated another record at $129.4 million of revenue in Q3, 101% higher than our previous product record in the prior quarter.
    		$129.4M—101% higher than previous record—

    Operational metrics

    11
    Non-GAAP Gross Margin
    63.8%up 17 bps sequentially
    Q3 FY25

    Above the high end of guidance range.

    Product Non-GAAP Gross Margin
    63%up 85 bps sequentially, up 152 bps year-over-year
    Q3 FY25
    Product Non-GAAP Gross Margin (excluding Product Engineering Services)
    62.4%up 229 bps sequentially, up 934 bps year-over-year
    Q3 FY25

    Primarily due to increasing scale. Amazon warrant contra revenue roll-off was also accretive to margin.

    Non-GAAP Operating Expenses
    $43.8Mup 16% sequentially
    Q3 FY25

    Within guidance range, due primarily to higher head count.

    Non-GAAP Operating Income
    $42.4Mvs $8.3M in Q2
    Q3 FY25

    Up demonstrably due to leverage attained by achieving 87% sequential top line growth.

    Non-GAAP Operating Margin
    31.4%up nearly 20 percentage points sequentially from 11.5% in Q2
    Q3 FY25
    Non-GAAP Net Income
    $45.4Mvs $12.3M in Q2
    Q3 FY25
    Non-GAAP Net Margin
    33.6%
    Q3 FY25

    Above the high end of long-term net margin model of 28% to 33%.

    Capital Expenditure
    $4.6M
    Q3 FY25

    Driven largely by purchases of production equipment.

    Largest Customer Revenue Contribution
    86%
    Q3 FY25

    Customer mix will vary; expect 3-4 customers to be greater than 10% of revenue in coming quarters and fiscal year.

    PCIe Retimer TAM
    >$1B
    by 2027

    Market forecasters believe the TAM for PCIe retimers will exceed $1 billion by 2027.

    Industry KPIs

    9
    MetricValueDetails
    Gross margin63.8% (Non-GAAP), 63% (Product Non-GAAP), 62.4% (Product Non-GAAP ex-PES)%
    Free cash flow-$0.4MUSD
    Operating margin31.4% (Non-GAAP)%
    Operating expenses$43.8M (Non-GAAP)USD
    Operating cash flow$4.2MUSD
    Revenue growth rate$135MUSD
    Cash investments balance$379.2MUSD
    Inventory channel inventory$53.2MUSD
    Segment end market revenue mixLargest customer 86% of revenue%

    Product announcements

    3
    ProductTypeDetails
    PCIe AECs (Gen6 64-gig PAM-4)launch
    Optical Solutions (200-gig per lane)launch
    Toucan PCIe Retimer (Gen5)milestone

    Deals & partnerships

    1
    Large AI server ODMFirst platform commitment for Toucan PCIe retimer

    Credo received its first platform commitment from a large AI server ODM for its Toucan PCIe retimer after positive evaluation feedback.

    Risks & headwinds

    3
    Customer concentrationQ3 FY25

    Largest customer was 86% of revenue in Q3 FY25.

    Mitigation: Expect 3-4 customers to be greater than 10% of revenue in coming quarters and fiscal year; 2 additional hyperscalers in qualification for FY26 production ramp.

    Working capital increasesQ3 FY25

    Cash flow from operations down sequentially to $4.2 million; free cash flow negative $0.4 million.

    Mitigation: Driven by significant sequential product ramp; free cash flow improved by $11.3 million from Q2; company remains well capitalized.

    Inventory build-upQ3 FY25

    Q3 ending inventory of $53.2 million, up $16.9 million sequentially.

    Mitigation: Necessary for significant demand ramp; closely managing execution and supply chain coordination.

    What to watch in Q4 FY25

    4

    Revenue diversification

    Coming quarters and fiscal year
    CurrentLargest customer 86% of Q3 revenue
    Target3-4 customers >10% of revenue

    Why it matters

    Reduces dependency on a single customer and indicates broader market adoption of Credo's solutions.

    As we shared last quarter, we had 7 customers that contributed more than 5% of revenue. And going forward⏳, we expect that 3 to 4 customers will be greater than 10% of revenue in the coming quarters⏳ and fiscal year as additional hyperscalers ramp to more significant volumes, as Bill described.

    Q&A highlights

    6

    Given the largest customer's 86% revenue contribution, what is the growth outlook for other customers and the strategy for diversification?

    Q3's high concentration was an outlier. Credo expects 3-4 customers to contribute over 10% of revenue in coming quarters and fiscal year, driven by AEC opportunities expanding from scale-out to scale-up networks. Three hyperscalers are in volume production, with two more qualifying for FY26 ramps.

    “our largest customer was 86% of revenue. So let me just give you some historical context there. As we entered our fiscal '25, we described a second half inflection point, really to be driven by our largest hyperscaler, which is exactly what we saw play out with that 87% sequential growth into Q3.”

    asked by Vivek Arya · answered by Daniel Fleming

    2 min read6 chapters

    Detailed Narrative

    01

    Hyperscale AI Platform Ramp Drives Record Revenue

    Credo reported record Q3 FY25 revenue of $135 million, marking an 87% sequential and 154% year-over-year increase, significantly exceeding guidance. This strong performance was primarily driven by the company's largest hyperscale customer scaling production of AI platforms. The ramp confirms the anticipated inflection point in Credo's business, underscoring the increasing demand for its high-performance, reliable, and power-efficient connectivity solutions in AI clusters.

    02

    Multi-Tiered Innovation and Expanding TAM

    Credo attributes its competitive advantage to a multi-tiered innovation strategy encompassing SerDes technology (up to 200-gig per lane), integrated circuit design (retimers, DSPs, chiplets like LRO DSP), and system-level solutions, notably pioneering the active electrical cable (AEC) market. This approach, supported by advanced software and firmware, enables the company to address complex bandwidth challenges and is expanding its total addressable market (TAM) with new PCIe protocol solutions.

    03

    AEC Business Expansion and Customer Diversification

    The AEC product line experienced strong triple-digit sequential growth, achieving new record revenue levels. AECs are increasingly replacing optical solutions for rack-to-rack connections up to 7 meters due to superior reliability (over 100x better than laser-based optics). Credo has reached volume production with three hyperscalers for Ethernet AECs and is qualifying with two additional hyperscalers, with production expected in fiscal '26, which is anticipated to drive greater revenue diversification.

    04

    Entry into PCIe Market with Strong Traction

    Credo is expanding its offerings to include PCIe AECs and retimers, targeting AI scale-up and scale-out networks. The company's Toucan PCIe retimer achieved full PCIe Gen5 compliance and secured its first platform commitment from a large AI server ODM. Production revenue for PCIe retimers is anticipated in calendar year 2026, with market forecasters projecting the PCIe retimer TAM to exceed $1 billion by 2027, positioning Credo for material market share.

    05

    Optical Business Progress and Future Opportunities

    The optical DSP business is on track to meet its FY25 growth objectives, driven by opportunities with over 10 transceiver vendors for hyperscale end-users. Current designs support 50-gig and 100-gig per lane for AOC and transceiver applications up to 800 gig. Credo is well-positioned for future 1.6T port deployments with its recent 3-nanometer 200-gig per lane DSP tape-out, highlighting its role as an innovator in the dynamic optical connectivity market.

    06

    Operational Leverage and Profitability Expansion

    The company demonstrated significant operating leverage in Q3, with non-GAAP operating income surging to $42.4 million from $8.3 million sequentially, and non-GAAP operating margin reaching 31.4%. Management expects this trend to continue, guiding for FY26 revenue growth greater than 50% and non-GAAP operating expenses to grow at half the rate of revenue, leading to further net margin expansion throughout the year.

    AI-generated summary of the company’s earnings call. Not investment advice.